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Court Looks to NOL Carryover Rules to Deny Taxpayer's Use of Late Husband's AMT Credit Carryover.

(Parker Tax Publishing MAY 2016)

The Tax Court held that a taxpayer could not use an alternative minimum tax credit carryforward that was generated by her late husband's exercise of incentive stock options in a year he filed a joint return with a former wife. Because there was no prior judicial guidance or regulations addressing the issue, the court looked to authorities limiting the transfer of net operating loss carryovers between spouses to conclude that the taxpayer could not take into account her husband's premarital adjusted net minimum tax liability in computing her own minimum tax credit. Vichich v. Comm'r, 146 T.C. No. 12 (2016).


Nadine Vichich was married to William Vichich from September 1, 2002, until his death on August 21, 2004. Before their marriage, Mr. Vichich was married to Marla Vichich until that marriage ended in divorce in January 2002. William and Marla Vichich filed a joint federal income tax return for 1998 in which they reported an alternative minimum tax (AMT) payment of approximately $708,000, which resulted from Mr. Vichich's exercise of incentive stock options (ISOs) granted by his employer.

After they married, Nadine and William Vichich merged their finances and agreed to file joint tax returns. They also merged their separate bank accounts into a joint account, which they both used for household expenses, and did not execute a prenuptial agreement. Mr. Vichich timely filed their 2002 and 2003 federal income tax returns. On a Form 8801, Credit for Prior Year Minimum Tax - Individuals, Estates, and Trusts, attached to their 2003 tax return, the couple claimed an AMT credit of zero and an AMT credit carryforward of approximately $304,000.

Mrs. Vichich filed a joint return as surviving spouse for 2004. She did not include an AMT carryforward from 2003, nor did she attach a Form 8801 to the 2004 tax return. The Estate of William Vichich filed a Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, in May of 2005. The estate tax return did not include an AMT carryforward or a Form 8801.

For tax years 2005 to 2008, Mrs. Vichich timely filed tax returns that did not include AMT carryforwards or Forms 8801. In January of 2010, Mrs. Vichich filed Form 1040X for 2007. The amended 2007 return claimed an AMT credit of $29,172 and included a Form 8801 and a Form 8275, Disclosure Statement. The IRS subsequently issued a refund of $29,172 to Mrs. Vichich for 2007. In April of 2010, Mrs. Vichich filed a Form 1040X for 2008 which claimed an AMT credit of $151,928 and included a Form 8801. The IRS disallowed the credit claimed on the 2008 return. Similarly, Mrs. Vichich claimed an AMT credit on her 2009 return which the IRS disallowed.

AMT Credit

Under Code Sec. 55, the AMT is imposed in addition to the regular tax if certain conditions are met. The AMT is the amount by which the tentative minimum tax exceeds the taxpayer's regular tax. The tentative minimum tax is computed on an income tax base of alternative minimum taxable income (AMTI), which is an income base broader than the usual base of taxable income for federal income tax in general.

Generally, under Code Sec. 421(a), a taxpayer is not required to recognize income upon the exercise of an ISO; however, Code Sec. 56(b)(3) provides that this rule does not apply for purposes of computing AMTI. The difference between the exercise price and the fair market value of the stock on the date of exercise (i.e., the spread) is treated as an item of adjustment and is included in the taxpayer's AMTI. Thus, while a taxpayer generally defers regular tax liability resulting from the exercise of ISOs until the stock is sold, the taxpayer may nevertheless incur AMT liability by virtue of having the spread included in AMTI.

Under Code Sec. 53(a), a taxpayer is allowed a minimum tax credit for AMT paid in prior years. In 2006 and 2008, Congress enacted Code Sec. 53(e) and Code Sec. 53(f), respectively. Those provisions allowed an individual to use a long-term unused minimum tax credit for any tax year beginning before January 1, 2013, and provided certain relief for underpayments, interest, and penalties attributable to the AMT treatment of ISOs.


In an issue of first impression, the Tax Court was asked to decide whether Mrs. Vichich was entitled to the AMT credit generated by her late husband while he was married to another woman. Mrs. Vichich argued that Code Sec. 53(e) allowed her to use the AMT credit that arose from ISOs exercised by Mr. Vichich. The IRS disagreed, arguing that neither Code Sec. 53(e) nor Code Sec. 53(f) provided Mrs. Vichich with the requested relief.

Tax Court's Analysis

At the outset, the court noted that neither party had questioned the availability of the AMT credit to Mr. Vichich following his divorce from Marla Vichich. Both the IRS and Mrs. Vichich, the court said, were proceeding on the assumption that the AMT credit belonged wholly to Mr. Vichich and that no part of it belonged to Marla Vichich, with whom he filed a joint return for 1998, the year in which he exercised ISOs that generated the AMT credit at issue.

According to the court, the issue of a tax benefit surviving a divorce is closely related to the issue of a tax benefit surviving the death of a spouse. In both cases, the marriage ceases to exist, and tax attributes reported on a joint return for an earlier year must be properly allocated for subsequent years to the divorced spouses or to the surviving spouse, as applicable. Whether any of the AMT credit at issue transferred to Mrs. Vichich upon the death of Mr. Vichich required the court to focus on 2004, the year of Mr. Vichich's death. At that time, the court observed, Code Sec. 53(e) and (f) had not yet been enacted. If the credit did not transfer to Mrs. Vichich, the court noted, then in 2009, the year in issue, Mrs. Vichich would have had no credit available and Code Sec. 53(e) and (f) would be irrelevant. So, the Tax Court focused first on the question of whether the AMT credit passed to Mrs. Vichich.

The court noted that, while the Code treats married taxpayers who file jointly as one taxable unit, it does not convert two spouses into one single taxpayer. It is well established, the court stated, that married taxpayers filing joint returns may use net operating losses incurred during the marriage to the full extent of their combined income. The court observed that several cases have analyzed whether, and to what extent, net operating losses sustained before or after the marriage may be used on a joint return. The Tax Court cited the Tenth Circuit's decision in Calvin v. U.S., 354 F.2d 202 (10th Cir. 1965), in which the court held that, for losses occurring before marriage, the net operating loss provisions are personal to the taxpayer who incurred such loss and only available in other years to offset income of the same taxpayer. The Tax Court also noted that, in Zeeman v. U.S., 395 F.2d 861 (2d Cir. 1968), the Second Circuit relied on the reasoning in Calvin to deny a loss carryback to the taxpayer in the "reverse situation" who sustained losses after her husband's death and then sought to carry them back to joint returns in which all of the reported income belonged to her husband. The court in Zeeman noted that the merger of married couples' income for tax purposes is linked between different years for only so long as they are married.

The court also looked to its decision in Rose v. Comm'r, T.C. Memo. 1973-207, where it held that a taxpayer could carry forward one-half of the net operating losses reported on joint returns during her marriage and offset them against separate income earned after her husband's death. The determining factor in Rose, the court noted, was the extent to which the taxpayer participated in the risk when the loss occurred; the taxpayer was essentially an equal partner with her husband and was therefore entitled to half of the net operating losses, whereas the losses attributable to her husband's participation in the business were not available for her to use in subsequent years. The analysis in Rose, the Tax Court said, agrees with the treatment of net operating losses under Rev. Rul. 74-175, which limits the deductibility of capital and net operating losses sustained by a decedent during his last tax year to the final return (whether separate or joint) filed on his behalf; the estate is not eligible to deduct such losses. Similarly, the court said, Reg. Sec. 1.170A-10(d)(4)(iii) provides that a taxpayer may not deduct the excess charitable contributions of his or her deceased spouse.


While the Tax Court recognized that the purposes of the AMT credit and the NOL carryover are not identical, it nonetheless found informative the authorities limiting the transfer of NOL carryovers between spouses. The court concluded that Code Sec. 53(e) and (f) had no bearing on Mrs. Vichich's ability to take into account, for purposes of the AMT credit, the adjusted net minimum tax imposed on her husband before their marriage. Therefore, because she could not deduct for a postmarital year an NOL incurred by her husband even during their marriage, much less before it, the Tax Court concluded that she was not entitled to take into account her husband's premarital adjusted net minimum tax liability in computing her own minimum tax credit for 2009.

For a discussion of the alternative minimum tax credit, see Parker Tax ¶12,170.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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